The Dark Side of Alan Greenspan

Who is Alan Greenspan? Any student of recent financial history knows that
Alan Greenspan is, above all other things, a political animal. Greenspan, who
has for years been able to lobby Capitol Hill as effectively as anyone, is
frequently spotted at Washington's and New York's most exclusive cocktail parties.
Former colleagues have spoken about how the chairman always likes to have his
finger on the pulse of every market and can get obsessed with being kept in
the loop on every major issue. While these character traits may fit his 'information
synthesizer' job description, we suspect they are signs of an egotistical and
insecure personality. We find it discomforting that Greenspan's official biography
(on a US Government website) boasts about his status of honorary Knight Commander
of the British Empire.

A half a century before he became "Sir Alan", Greenspan was known as an Ayn
Rand Libertarian often writing in defense of the gold standard. In 1966, Greenspan
published an essay titled Gold and Economic Freedom where he labeled deficit
spending as "simply a scheme for the confiscation of wealth." He went on to
say that "gold stands in the way of this insidious process. It stands as a
protector of property rights. If one grasps this, one has no difficulty in
understanding the statists' antagonism toward the gold standard."

Shortly after publishing his famous essay, Greenspan's political career began
to take off. Ironically, Greenspan started to move away from his Libertarian
principles about the time he began working for the Gerald Ford administration.
John Ridpath of the Ayn Rand Institute was once quoted saying "Alan Greenspan,
whatever his rationalization, has abandoned any philosophically principled
stance and compromised himself and what he learned from Ayn Rand over and over."

Richard Russell of Dow Theory Letters has written, "Alan Greenspan...of
all people knows all about the Federal Reserve and money and gold. For this
reason, I consider him one of the great 'sell-outs' of today. Not only has
Greenspan headed the Fed but he turned out to be the greatest inflationist
in American history."

It is quite obvious that some time during the 1970s, Greenspan was seduced
by the power of New York and Washington. Greenspan began to date women
such as Kay Bailey Hutchison, Barbara Streisand, Andrea Mitchell (whom he
later married) and other high-profile celebrities. Ayn Rand was once quoted
saying "Oh, Alan is so brilliant, but he's such a social climber." Greenspan
became addicted to the attention he was receiving from the highest levels
in the White House and on Wall Street. Selling out his sound money principles
in exchange for a lifestyle of private jets and fancy limousines didn't seem
to bother Greenspan.

By the time Greenspan became chairman of the Federal Reserve; he had fully
removed himself from his sound money principles and turned to running the printing
presses at full capacity. The final straw was broken in 1995 when Greenspan
sold out to Bill Clinton's artificially strong dollar policy in exchange for
an appointment to a third term. Greenspan's sell-out, which contributed to
the bubble in the late 1990s, helped re-elect President Clinton. Greenspan,
in addition to getting a third term, became a supernatural being to those on
Wall Street and a cult hero to millions around the world. Such godlike status
can be quite addicting, and create a self-fulfilling prophecy that one's policies
are actually working no matter how warped they are.

Greenspan's solution to every economic crisis has been to print more money
- often by cutting rates which has the effect of increasing credit. The Fed
cut interest rates in 1998 partly due to the blowup of hedge fund Long Term
Capital Management. When fears of Y2K hit the American populace in 1999, the
chairman put his foot on the monetary pedal and increased liquidity to extreme
levels. A significant amount of that newly created money found its way into
internet and other technology stocks fueling the greatest stock market bubble
in history. As the NASDAQ bubble deflated in 2000-2002, Greenspan should have
let the detoxification process take its course. Instead, he poured Americans
another drink and cut rates again to the lowest levels since the Eisenhower
administration. Such a low rate monetary policy has spawned a dangerous credit
and housing bubble which still exists today.

Most members of congress and the media remain utterly clueless about the effects
of monetary policy. The market rises, Greenspan is a hero. The market falls,
he is a goat. Until recently the market has mainly been going up drawing cheers
of admiration from the investing public. Apart from Bernie Sanders (I-VT) and
Ron Paul (R-TX), most congressmen fail to make good use of Greenspan's appearances
on Capitol Hill. Republicans and Democrats will either ask elementary school
level questions or try to get the chairman to endorse (or reject) a particular
policy position. The members of the financial press will spend their time pondering
the Fed's next interest rate move and trot out all the usual prognosticators
for their predictions. Instead, they should pay more attention to the concerns
of Reps Sanders and Paul and a few other congressmen who question the behavior
and existence of the Federal Reserve. Regrettably, this ignorance displayed
by the media and general public plays right into Greenspan's hand. With the
general public treating his each and every word as Holy Scripture, he has been
able to conveniently shift the blame for his mistakes to others. For example,
Greenspan often cites budget deficits and energy prices as reasons why the
economy may turn south in the near future. Since both of those macroeconomic
variables are very important, the press goes along and ignores the real reason
why we find ourselves in today's dire monetary situation - easy credit. When
trying to explain job losses, the press blames corporate CEOs who outsource
labor from China rather than the real culprit - Alan Greenspan and his policy
of keeping interest rates artificially low. Greenspan frequently blames corporate
corruption for the economic slowdown of 2001-2002 while he knows that such
dishonest practices have been going on for years and continue to go on today.
Corporate dishonesty was a symptom of the disease and not the disease itself.
The insidious disease was cheap and easy credit which spawned spell-binding
asset inflation and earned Greenspan a much deserved moniker "Easy Al."

A few very interesting questions have popped up in circles around Wall Street
and Washington over the last few months: If he had to do it all over again,
would Greenspan have gotten out of the game (with Bob Rubin) at a time when
he could've exited with his reputation unscathed? Does Greenspan realize that
his fate as a "modern day John Law" awaits him in the history books? Will the
White House name a new Fed Chairman immediately after the election since the
law forces Greenspan to retire after 2005?

Greenspan is primarily concerned with how he will be viewed by future generations.
As far as the long-term health of the American economy, well, this is a trivial
matter. We suspect Greenspan has been plotting for months about how to find
the best way to abandon ship without scaring the markets or hurting his reputation.
This may be the reason why he has repeatedly warned about high energy prices,
the viability of social security, protectionism and spiraling fiscal deficits.
If any one of these forces takes hold of the American economy over the next
few months, Greenspan will try to slip out with his reputation unharmed. If
the market suddenly shoots higher, the chairman may be able to get out in a
manner similar to Bob Rubin. We also would not be surprised if Greenspan suddenly
decides to resign due to 'health problems'. These rumors have hit trading floors
over the last few months and the reaction hasn't been too devastating. Whatever
the case may be, we advise readers to ignore the rate-guessing game and pay
more attention to Greenspan's actions as well as any signs of a deteriorating
relationship with the administration.

Todd Stein & Steven McIntyre are internationally known
analysts and editors of The Texas Hedge
Report, a market newsletter that highlights under and overvalued securities
in the equity, bond, currency, and commodity markets. For more information,
go to http://www.texashedge.com